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KYIV -- A high profile test of Ukraine’s ability to use the courts to protect foreign investors may not end with bang, but with a whimper.

Two years ago, American, British and French holders of $1.1 billion debts of Mriya Agro Holding, installed new British management to turn around a company which once was the darling of investors in London and Paris. Called Mriya, or ‘Dream,’ the agrobusiness had wheat, corn and sunflower fields spreading over an expanse of black earth almost the size of Rhode Island.

Failed Founders Fight Back

But, in face of this foreign workout, the farm group’s original owners, the Guta family, responded by ignoring pressure from Kyiv’s government, and foreign banks. Instead, they worked to rebuild their lost farm empire.

As a warning, one Mriya farm employee was badly beaten. Then, 30 armed men stole millions of dollars of farm machinery. The farm’s two helicopters disappeared. Farm land leases were signed over to the Gutas or to their shell companies. Court judgments started going against the new managers.

Despite promises of aid from reformist members of the national government, the writ of Kyiv did not prove to extend five hours west, to the farmlands of Ternopil oblast.

“The Gutas have a good chance of creating Mriya No. 2, because they have very good political capital in Ternopil – friends, relatives on city councils, village councils, the administration,” Alexander Paraschiy, a Concorde Capital analyst, said in an interview last month. “They know all the judges. All are their friends. They can influence their landlords, and even force landlords to pass land lease rights to the Gutas.”

Solution, Ukrainian-style?

Then, on Monday, a Ukrainian-style solution emerged.

Andriy Verevskyi, CEO of Kernel Holding S.A., announced in a conference call to investors that part of a $500 million eurobond issuance would go to bidding for Mriya’s nearly 200,000 hectares of leased land.

Watching from the sidelines, a Ukrainian-American farm manager with decades of experience here, predicted a brass knuckled outcome for Mykola Guta, Mriya’s former CEO, and his brother, Andriy.

“The Guta brothers will just fade away,” he said of the alleged architects of the $1.1 billion farm fraud. “Why? They know that whatever they pay a judge, Kernel can just pay two or three times as much.”

Kernel: Big Player

Kernel says it does not pay bribes.

But for two rural farm bosses operating in a legal gray zone, Kernel would be a formidable adversary. The most heavily traded Ukrainian company on the Warsaw Stock Exchange, Kernel is the world’s largest producer and exporter of sunflower seed oil. On Wednesday, its five-year bond issue, the first marketed overseas in three years by a Ukrainian company, was three times oversubscribed.

On Tuesday, Mriya issued a statement that its Creditor Committees rejected offers from two suitors. But it said it was keeping its books open for future audits. According to a non-Mriya source, the second suitor is Astarta Holding, another Ukrainian ag heavy hitter. Also traded on the Warsaw Exchange, Astarta is Ukraine’s largest sugar producer.

“Although Mriya did not reveal the identity of the potential buyer, we think it’s highly probable that Kernel will continue actively negotiating with Mriya, as well as other agricultural companies, regarding asset acquisition,” Igor Zholonkivskyi, a Concorde Capital financial analyst, wrote Wednesday.

On Wednesday, Simon Cherniavsky, Mriya’s British CEO, told the UBJ: “It’s too early to say there will be a deal.”

“The bondholders are committed to recovering their assets, restructuring processes continue irrespective of a sale,” he continued. Creditors have provided $46 million in working capital, in time for purchasing seeds and fertilizer for the spring sowing season.

Last fall, bondholders agreed with banks to cut Mriya’s $1.1 billion debt by 70 percent, while formally taking control of the equity.

Failed Litmus Test?

Creditors publicly put Kyiv on notice: the whole world is watching.

“We see the Mriya case as a litmus test for further investment in Ukraine,” John C. Patton, regional portfolio manager Argentem Creek Partners, told the UBJ. “Can the government establish an environment that enables successful turnarounds and allows uncorrupt business practices to exist and flourish? I think yes, but there is much to be done to prove that."

Now, the inability of the Kyiv government to enforce the law highlights limits of reforms here.

In late 2014, despite Kyiv’s office of Ernst & Young repeatedly approving Mriya’s accounts, a $1.3 billion hole in the accounts developed. Mykola Guta was placed under house arrest in Switzerland, after being placed on Interpol’s wanted list for charges of premeditated fraud on a large scale. Three years later, there are no indictments or trials in the case.

Kyiv Officials Said They Wanted to Help

In September, the UBJ asked Prosecutor General Yuriy Lutsenko to confirm the status of the case. He assured Mriya officials that he was looking into it.

In October, Valeria Gontareva, governor of the central bank, said on television of Mriya's debt restructuring: “We very much welcome what Mriya has been able to do. I can say that this is the first effort of this kind in our country.”

In November, Dmytro Shymkiv, deputy head of Ukraine’s Presidential Administration of Ukraine for economic reforms, assured foreign reporters that President Petro Poroshenko was ‘engaged’ in the Mriya case, pressing law enforcement officials to take action.

“We have investors who have been cheated, a full commercial fraud,” said Shymkiv, the former CEO of Microsoft in Ukraine. “Guta is under house arrest in Switzerland. We expect that NABU will speed up the case took over in July. Cases like this should be prosecuted.”

But the National Anti-Corruption Bureau of Ukraine, or NABU, did not take any actions that visibly curtailed the Guta brothers activities.

Impunity Reigns

On the ground, the reality was impunity.

“The Ternopil police behavior during the illegal raid of our logistics base looked very one-sided, basically corrupt to us,” said Cherniavsky. “Recently, there was a decision by a judge in Kyiv remove an arrest warrant against Mykola Guta -- all sorts of weird things going on.”

Last fall, Krzysztof Siedlecki, then-president of the European Business Association, summed up the feeling of many foreign investors at a Ukraine investment forum here: “This anti-corruption fight is like watching fishing on the Discovery Channel: catch, kiss, and release. How many are in jail? I have not heard of any.”

Even if a Kernel's purchase goes through, it is unclear how much of its $500 million Eurobond would go to Mriya. Already about $300 million is earmarked for two projects, doubling the capacity at its Black Sea grain terminal to 8 million tons and buying an oil processing plant with production capacity of up to 1.5 million tons.

Lesson: Caution!

As Ukraine starts to grow again after two years of recession, Mriya now stands as a cautionary tale.

“The financials of any ag company are easily manipulated,” Paraschiy of Concorde Capital said of the faulty audits. “Mriya is a bad example for Ukr business. It closes some doors for a new Ukrainian ag company to raise money on international markets.”

Foreign management, foreign technology, and foreign capital can work wonders on Ukraine’s black earth. But local partners have to be chosen carefully.

Photo: Three new tractors, of a lot of 10 that were purchased last spring. They were parked at a Mriya logistical base, in Khorostiv, that is occupied by raiders loyal to the original owners of the bankrupt farm. (Credit: Mriya)

Photo: Mriya combines harvest grain on a sea of gold that stretches to the horizon. (Credit: Mriya)

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